California FAST Act raises minimum wage to $20 for fast-food workers

California's FAST Act legislation is going into effect on Monday, April 1, mandating fast-food chains with over 60 locations nationwide to increase their minimum wage to $20 per hour within the state. Major names like Starbucks (SBUX), McDonald's (MCD), and Chipotle (CMG) will be significantly impacted by this new law.

Yahoo Finance's Brooke DiPalma breaks down the details, providing insights into how these affected chains may attempt to offset the substantial wage increases.

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Editor's note: This article was written by Angel Smith

Video transcript

JARED BLIKRE: California fast food company is facing a new obstacle today as the FAST Act takes effect. Now, fast food chains that have at least 60 locations nationwide now need to raise their minimum wage for restaurant employees to $20 per hour. That's up from $16 per hour. Yahoo Finance's Brooke DiPalma has all the details. Brooke.

BROOKE DIPALMA: Good morning to you both. I mean, certainly, this is just impacting fast food companies that have a nationwide presence more than 60 locations. But they will only be raising their minimum wages based upon this legislation in California. Does go into effect in that state today, raising that minimum wage to $20 an hour. But this has been looming for so many restaurants that have a big presence in California.

And those with the largest include names that we go to, that we visit, that we talk about almost every day like Starbucks, like McDonald's, Jack in the Box, Taco Bell, Subway, among so many others. And companies really here had two options. They could either absorb that wage increase like Cava did. Or they could pass along higher prices like Chipotle suggested that they would choose to do.

But companies that are better positioned to withstand this latest headwind include companies that have strong branding power, strong value proposition, and a diverse geographic footprint. And some of those companies you could see that we're flying through now, Wendy's, McDonald's, Burger King, they tend to have a better position to withstand this latest wage increase in California because of their sheer scale. That's a plus with national and international locations.

Chipotle has this strong value proposition where you can get a $9 burrito bowl with chicken in it across the country. And they also have good traffic. As of late, Wingstop has really been ramping up their brand awareness. This will put them in a better position. And Domino's, they have what one analyst calls an unbeatable low price pizza deal that will ultimately help them with this latest wage increase.

But Jack in the Box, they have about 43% of their restaurants. In California 60% of their subsidiary, Del Taco locations are in California. And also their diners tend to SKU lower income. And we know that is one income cohort that has been slightly pulling back at fast food restaurants as of late. So they are not as best positioned there. Not worse position, but definitely going to face some struggle here to offset that higher minimum wage cost.

MADISON MILLS: So Brooke, given that this is coming in an inflationary time period where restaurants have already been trying to find ways to beef up their profit margins, I'm curious what your sources have told you about any job cuts that could come off the back of this news.

BROOKE DIPALMA: Yeah. Well, I did speak to one franchise owner who said that this will cost him 470,000 additional dollars annually. And so he has to let go some workers. That's what he's choosing to do. He even said that he might pull out of California entirely. He is a franchise owner of Cinnabon and Auntie Anne's. Whereas other analysts have told me that job losses, they don't expect it to be widespread.

They said that restaurants are just returning to those pre-pandemic staffing levels. And so they don't want to necessarily cut jobs that they just got back. But what we could see here is how does automation play into all this? Will companies be upping the investment? Because when you think about $20 an hour, how does that compare to the cost to invest in technology to implement automation to offset the labor costs. Right now as wages increase, we're seeing that cost sort of level out here.

JARED BLIKRE: Arms race.

BROOKE DIPALMA: Yeah.

JARED BLIKRE: Definitely.

MADISON MILLS: Yeah. That's a great point, Brooke.